Ahram Online: The Trade Report highlights the complex relationship between trade and inclusivity. What are the most significant findings you have reached regarding this relationship?
Ralph Ossa: The report reaches three main conclusions. First, trade has a strong track record as a driver of inclusiveness between economies and within economies. Trade-led economic growth has improved the lives of hundreds of millions of people with the share of people living in extreme poverty in low- and middle-income economies dropping by 73 percent between 1995 and 2023, while their share of trade in GDP doubled. This shift has significantly contributed to reducing malnutrition and infant mortality, as well as improving access to education, healthcare, and electricity.
Second, despite this success, so many people and economies remain left behind, particularly in Africa, the Caribbean, Latin America, and the Middle East. For instance, Egypt has been slowly diverging from high-income economies, with a growth rate of GDP per capita adjusted for inflation lower than the average growth rate of high-income economies.
Third, protectionism does not protect the overall economy, and it does not support inclusiveness. Ensuring the economy and trade are more inclusive requires a comprehensive and coherent strategy that integrates open trade with complementary domestic policies and fosters greater international cooperation. For example, digital trade offers significant potential for less integrated economies, but these opportunities can only be realized by improving digital infrastructure and skills and adopting an enabling legal and regulatory environment. In that context, collaboration between the WTO and other international organizations is important to ensure that trade policies are effectively integrated with broader international and domestic policy frameworks.
AO: Many low and middle-income economies face challenges in integrating into global trade. What are the main factors hindering this integration, and how can developing countries benefit more from trade opportunities?
RO: While each diverging economy has its own unique characteristics, they often have a low level of participation in international trade compared to their average income group peers and have high trade costs. The WTO Trade Cost Index, which measures the frictions remaining in international trade relative to domestic trade, reveals that trade costs are 30 to 35 percent higher in low- and middle-income countries than in high-income economies, in services and manufacturing respectively. Africa and the Middle East also face the added challenge of higher trade costs when trading within their own regions compared to partners from outside. Other diverging low and middle-income economies tend to be primarily specialized in commodity exports and are less economically diversified despite high trade participation.
Poorly functioning capital, labour and land markets impede to take advantage of new trade opportunities. For instance, inadequate land registries and weak legal systems hinder investment in agriculture. Similarly, barriers to foreign direct investment (FDI) and technology transfer can impede productivity growth, innovation, and ultimately, growth.
Addressing trade costs is essential to benefit more from trade opportunities. This means reducing the trade costs of low- and middle-income economies, including improving trade facilitation and trade finance and cooperating to reduce the trade costs faced when exporting to international markets. Besides trade policy, improving local workforce skills, infrastructure, the business climate and the competitiveness of local supply chains are essential to maximize trade opportunities.
AO: The report mentions that trade supports many jobs, but at the same time, it may lead to some challenges. How can we balance the benefits of trade and its negative impacts?
RO: The gains from trade are unevenly distributed among individuals within the economy. While trade benefits many through more affordable goods and services and new job opportunities, some workers may experience challenges due to import competition. Individuals with lower incomes, workers with fewer skills, and small business owners, including women-owned businesses, can face more challenges adjusting to the new economic conditions associated with trade openness.
Tariffs are a very costly and ineffective solution to protect these workers. First, they only work if they increase domestic prices paid by consumers. Second, they may lead to retaliations which would make them ineffective. Improving access to education, developing capital markets, excessive labour market regulations, addressing labour market informality and excessive market power in some products and labour markets can help increase people's capacity to engage in international trade, mitigate the risks from trade faced by those left behind and maximize the gains from trade. These complementary policies are similarly needed to support inclusiveness between economies by accelerating economic convergence.
AO: What strategies do you recommend for countries to diversify their exports and make their economies more resilient in the face of external shocks?
RO: Trade tends to be seen as a source of shock. Indeed, trade can contribute to the spread of shocks by exposing economies to foreign risks. Trade can even be a source of shocks, as illustrated by the Suez Canal blockage by a large container ship.
Yet, trade also plays a key role in economic resilience. GVC (Global Value Chains) disruptions we have seen during the COVID-19 pandemic and the war in Ukraine have been short-lived. Trade rebounded very quickly once COVID-related restrictions were lifted. GVCs have helped increase the production of face masks required by the market in record time and they also helped with the distribution of vaccines.
Economies open to trade are better equipped to deal with shocks, such as wars, pandemics, or natural disasters. Trade contributes to more economic resilience by helping economies to better prepare for, cope with, and recover from shocks. As a source of economic growth and productivity, trade provides economies with technical, institutional and financial means to prepare for shocks. Trade makes it easier for economies to cope with shocks by offering alternative sources of supply in case of domestic shortages and alternative markets in case of a fall in domestic demand. Trade can further accelerate economic recovery after a shock hit by facilitating access to competitively priced intermediate products and services; ensuring that critical services, such as insurance, telecommunications, transportation, logistics services, and other vital products are available on time before and after a shock hits. Trade also enables access to foreign demand. For instance, merchandise trade recovered more quickly than GDP after the initial shock of COVID-19.
AO: What are the difficulties faced by specialized economies?
RO: The problem may arise when economies are highly specialised, or trade is highly concentrated. Economies highly specialised in one commodity are particularly vulnerable to external shocks, such as high commodity price volatility. Volatile export earnings are a source of macroeconomic instability in these cases. Financial market development is essential to mitigate the negative effects of commodity price volatility. However, in the long term, diversification away from the natural resources sector can help to support economic development and resilience. Governments have used a wide array of inward- and outward-oriented policies to steer the economy towards certain sectors and activities. Export promotion can help domestic firms to expand into new products and markets. However, export restrictions appear to be an ineffective diversification policy. Successful industrial policies tend to hinge on the complementarity of various domestic policies. Implementing market reforms and policies that facilitate the movement of workers and capital between firms and sectors, improve the business environment, and help attract foreign investment and technology can help develop a more diversified economy and maximize the gains from trade participation. At the international level, addressing tariff escalation in export markets and the market power of large global commodity buyers can help remove some of the obstacles to diversifying into higher value-added products.
Excessive dependency on exporters can expose a country to the risk of weaponization of trade. Re-globalization and thus geographical diversification, the expansion of trade to new areas, and continued and expanded multilateral trade cooperation can contribute to greater security.
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